Power generation firm Drax Group PLC (LON:DRX) will benefit from a European subsidy before 2016 is out, or at least that’s the message coming from one top City bank.
Drax – which has a power plant in Yorkshire – has been trying to secure a European Commission contract for difference (CfD) for most of this year now, which is designed to promote the generation of renewable energy.
If approved, the subsidy would see it paid a fixed price of £100 for every megawatt-hour (MWh) of biomass-fired power the unit generated until 2027 – well over the current market price.
The CfD was due to be awarded earlier on in the year, but was delayed after the EC launched an investigation over concerns that it may be too generous.
The offer back in January was £105MWh, but the recently-revised figure of £100MWh is unlikely to change now and should be in place before the New Year, says Barclays analyst Stephen Hunt.
“We believe approval by end 2016 remains most likely. We see little justification, and thus see it as unlikely, for the EC delaying Drax’s CfD approval.
“In light of the EC having already cut Drax’s CfD from £105/MWh to £100MWh….we see a further material cut as low probability.”
This assumption that the subsidy will be awarded sooner rather than later has led to Barclays upping its price target for the stock to 325p from 320p.
“We update forecasts for current forward wholesale energy prices, company guidance, and assumptions on CfD approval timing.”
It doesn’t, however, see any reason for it to upgrade its overweight, with Hunt still convinced that Drax is fully-priced currently.
“While uncertainties remain and Drax’s stock isn’t riskless, we see valuation skewed to the upside in most realistic scenarios,” the analyst said in a note today.
Hunt does warn that should the go-ahead not be given in the near-term as expected, it will likely hit underlying earnings and the share price.
He explains that for every month the approval is delayed until February, the share price could be impacted by as much a 1p, while any delay past that would results in a 2p drop per month.
Underlying earnings could also fall as much as 8% depending on the length of the delay.
Shares in Drax were marginally up to 281.5p on Friday afternoon.